Sunday, January 16, 2011

Markets rise on successful Portuguese bond auction

US markets rose last week on better-than-expected results from euro zone bond auctions. Markets rose on Friday on better-than-expected earnings from JP Morgan Chase. The S&P 500 gained 9.48 points or 0.74% to 1,293.24, while the Dow gained 55.48 points or 0.47% to 11,787.38. For the week, the S&P 500 rose 1.7%, while the Dow gained 1%.

 JP Morgan reported 4th quarter earnings that rose 47% over last year, pushing EPS from $0.74 to $1.12. The S&P 500 also rose for the 7th week in a row.

However, not all news from the US was positive. It was reported on Thursday that initial jobless claims last week rose unexpectedly. In addition, sales at US retailers rose less than expected in December.

Successful euro zone bond auctions

Early in the week, Portugal auctioned $599 million and $650 million euros of 4- and 10-year government bonds. On the 10-year bonds, the Portuguese government paid a yield of 6.71%, which was lower than the 7% that investors had expected. It was also lower than the 6.8% in the November auction.

However, 6.71% is still an unsustainable rate. In addition, the lower-than-expected yield was partially caused by the ECB buying bonds of troubled euro zone nations. Thus, Portugal is still expected to be receiving a bailout from the EU and IMF.

Gold falls

As a result of the successful bond auctions in the euro zone, the price of gold fell on receding fears. On Friday, spot gold fell 1% to US$1,359.5/ounce. Gold recorded a loss of 4.3% in 2 weeks.

Outlook for the coming week

With the S&P 500 having risen for 7 consecutive weeks, it is susceptible to a sell-off. The euro zone debt crisis is also far from over. While one successful bond auction may be encouraging, Portugal alone needs to auction $20 billion euros of bonds this year.

Thus, there are many more euro zone bond auctions ahead this year. In addition, with the yield on its debt at current levels, it is clear that Portugal will need a bailout. The bigger question is which country will be next after Portugal.

With the US banks having very weak earnings last year to compare their earnings season to this earnings season, it could be easy for them to post stellar results. Thus, good bank earnings could limit downside in the markets. However, one or more worse-than-expected earnings from a major bank could start a sell-off in a market that is ripe for a correction.

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